How RBI’s Rate Cuts Affect FD Returns – Should You Consider Liquid Funds?

If you’re someone who loves the safety and certainty of Fixed Deposits (FDs), it’s important to understand how the Reserve Bank of India’s (RBI) recent moves might affect your savings — and whether there might be better options, like liquid funds.

What Has the RBI Done?

On June 6, 2025, the RBI cut the repo rate by 50 basis points, bringing it down to 5.5%. The repo rate is the interest rate at which the RBI lends money to banks. When this rate goes down, banks can borrow money more cheaply, so they tend to lower their lending and deposit rates.

Additionally, the Cash Reserve Ratio (CRR) has also been reduced by 1%. This means banks have to keep less money with the RBI and can lend more. In total, these changes have put more money into the financial system and encouraged banks to lend more.

Impact on FD Interest Rates

Because banks can now borrow more cheaply from the RBI, they’re reducing the interest rates they offer on FDs. Over the last few months, FD interest rates have already fallen by up to 0.7%.

Some banks are still offering good rates for senior citizens, even up to 9.10%, but these high rates might not last long. If you’re planning to invest in an FD soon, it might be wise to do so before rates drop further.

What Should You Do as an FD Investor?

Lock in Current Rates: If you find an FD with a good interest rate, it might be smart to lock it in now for a longer tenure.

Use Laddering: Spread your money across different FDs with varying maturity dates. This strategy helps you manage risk and keeps some of your money easily accessible.

Consider Other Options: Besides FDs, there are other low-risk investments like the Public Provident Fund (PPF), National Savings Certificates (NSC), and even liquid funds.

Liquid Funds: A Viable Alternative?

Liquid funds are a type of debt mutual fund that invests in short-term money market instruments. They offer:

• High liquidity (you can get your money back in 1–2 days).

• Competitive returns, which currently stand around 7.3% to 7.4% (as of June 2025).

• Potentially better post-tax returns for those in higher tax brackets because long-term capital gains from liquid funds are taxed at 20% with indexation, while FD interest is fully taxable.

However, remember that liquid funds’ returns are market-linked and can fluctuate slightly. They’re still considered low-risk, but not as “guaranteed” as FDs.

Tax Rules for FD and Liquid Fund Interest

• FDs: Interest income is fully taxable and added to your total income. TDS applies if interest exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.

• Liquid Funds: Gains are taxed as capital gains. If you hold them for over 3 years, you get indexation benefits, which can significantly reduce your tax liability.

The RBI’s recent policy changes have made borrowing cheaper for banks, which means they’re likely to reduce the rates they offer on FDs. As an investor, you can:

Act quickly to lock in higher FD rates. Use laddering to spread risk. Explore other low-risk investments like PPF, NSC, and liquid funds.

If you’re in a higher tax bracket or want more liquidity, liquid funds might be a smart alternative to FDs. With careful planning, you can make the most of your money — even as interest rates start to fall!

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Disclaimer: The views expressed in this article are intended for educational purposes only and should not be considered as buy/sell recommendations. Investing in stocks involves financial risk. Please consult a qualified financial advisor before making any investment decisions.